Beware the rent-seeking organisation: don’t be dudded by housing data

One of the more inter­est­ing out­comes the 2011 Cen­sus pro­duced was the fig­ures con­cern­ing the hous­ing mar­ket. The rea­son for this inter­est is how the results con­trast­ed with the idea that Aus­tralia cur­rent­ly suf­fers from an acute hous­ing under­sup­ply or short­age. Tak­ing the lead in pro­mot­ing this idea is the Nation­al Hous­ing Sup­ply Coun­cil (NHSC), an organ­i­sa­tion formed by the fed­er­al gov­ern­ment in May 2008 to pro­vide an in-depth analy­sis of the hous­ing mar­ket. The NHSC is wide­ly con­sid­ered to be the peak body in this field.

Unsur­pris­ing­ly, in its first report – State of Sup­ply Report 2008 – released in March 2009, the NHSC con­clud­ed that a deficit or gap of 85,000 dwellings exist­ed. Here was the most com­pre­hen­sive study of Australia’s hous­ing mar­ket, a dense 172 pages. The alarm­ing short­fall of dwellings made instant head­lines in the media, not least because it pro­vid­ed con­crete proof that Australia’s rock­et­ing hous­ing prices were strong­ly affect­ed by this short­age. Both gov­ern­ment and indus­try broad­cast­ed the NHSC’s results because it con­firmed the sus­pi­cion that a short­age did, in fact, exist – and that some­thing could now be done about it. The bank­ing and real estate sec­tors were also very sup­port­ive, as their own argu­ments about a hous­ing short­age were now con­sid­ered irrefutable.

There was only one small prob­lem: the pur­port­ed short­age of 85,000 dwellings was com­plete fic­tion.

In order to arrive at the short­age, the NHSC had to employ a method­ol­o­gy of the most dubi­ous nature – a trav­es­ty of basic sci­ence. The short­fall of 85,000 dwellings was com­posed of the fol­low­ing: 1) 9,000 to address home­less­ness of those sleep­ing rough, 2) 35,000 to address home­less­ness of those stay­ing with friends and rel­a­tives, 3) 13,000 to house mar­gin­al res­i­dents of car­a­van parks, 4) 26,000 to increase the rental vacan­cy rate to three per­cent, and 5) an extra 2,000 to round up to the near­est 5,000!

The prob­lems with this analy­sis are legion, and were quick­ly unmasked by Aus­tralian econ­o­mists Kris Sayce and Steve Keen, and are cov­ered briefly here. While home­less­ness is indeed a seri­ous prob­lem with tens of thou­sands suf­fer­ing from this plight, these per­sons (typ­i­cal­ly on the low­er income scales) do not have the finan­cial pow­er to turn their needs into demand on the prop­er­ty mar­ket. Instead, the NHSC pro­duced evi­dence of social need but not actu­al demand. The same goes for the res­i­dents of car­a­van parks.

The fourth cat­e­go­ry is an inter­est­ing one because it assumes that data sourced from the Real Estate Insti­tute of Aus­tralia (REIA) and its state-lev­el affil­i­ates are also based upon sound method­ol­o­gy. As I have cov­ered else­where, the report­ed vacan­cy rates are like­ly to be severe­ly biased down­wards giv­en the appalling method­ol­o­gy, data-gath­er­ing tech­niques, and lack of inde­pen­dent over­sight (audit­ing). The last point is self-explana­to­ry: who on earth rounds up to the near­est 5,000?

These high­ly ques­tion­able sta­tis­tics were pro­duced by Australia’s “peak” body. The NHSC is a body stacked with indus­try and for­mer gov­ern­ment pro­fes­sion­als. Its con­tin­ued fund­ing would most like­ly quick­ly dry up were they to find that no short­age exist­ed. If instead a sur­plus was found, the NHSC’s brief exis­tence would come to an end as dwelling sup­ply con­sid­er­a­tions are found not to be an issue in price infla­tion.

The out­come is obvi­ous: if a short­age can be found, then gov­ern­ment is much more like­ly to enact poli­cies favourable to indus­try. Ask­ing the NHSC if there is a short­age is sim­i­lar to ask­ing Drac­u­la if the blood bank needs to be expand­ed because of a deficit – the answer is already pre­de­ter­mined and reflex­ive.

Lit­tle more could be expect­ed in the 2010 and 2011 reports. The NHSC per­formed a back­flip, admit­ting that it was uncom­fort­able with its pre­vi­ous method­ol­o­gy giv­en the obvi­ous prob­lems with it. It is unlike­ly that the NHSC would have changed course if not for the bar­rage of ridicule it expe­ri­enced from those who read the report and were hon­est enough not to give their silent approval. Each report pro­vid­ed an increas­ing­ly dis­mal prog­no­sis as the short­age had increased to 185,000 in 2011 and, if present cir­cum­stances remained the same, there is expect­ed to be a short­age of 640,000 dwellings by 2030.

But noth­ing changed. The NHSC had to find anoth­er pre­text for the pre-sup­posed short­age, this time by cre­at­ing a cat­e­go­ry called “under­ly­ing demand”, dri­ven pri­mar­i­ly by immi­gra­tion and oth­er demo­graph­ic fac­tors. This would appear to be a more sound method­ol­o­gy if not for the fact that the num­bers were sim­ply made up again.

The pseu­do-sci­ence of the NHSC has not pre­vent­ed vest­ed inter­ests from pro­mot­ing its con­clu­sions as fact and cru­cial­ly relies upon the pub­lic not read­ing through hun­dreds of pages (630 in all) of eco­nom­ic and sta­tis­ti­cal analy­sis to under­stand this. After all, the pub­lic is sup­posed to trust the “experts”. It is worth read­ing through these three reports in order to realise how the phrase “lies, damned lies, and sta­tis­tics” rings true.

The non-exis­tent hous­ing short­age prob­a­bly com­pris­es the most pop­u­lar argu­ment used by the bub­ble deniers to jus­ti­fy astro­nom­i­cal hous­ing prices. As Aus­tralia is appar­ent­ly suf­fer­ing from a chron­ic deficit of dwellings, demand is great­ly out­strip­ping sup­ply, lead­ing to ris­ing prices.

The prob­lem with this argu­ment is it can’t explain why prices start­ed to rise in 1996 and have sky­rock­et­ed onwards, espe­cial­ly dur­ing 2001–2004. Annu­al pop­u­la­tion growth between 1996 and 2005 reg­is­tered at approx­i­mate­ly 1%, but dwelling growth (adjust­ed for demo­li­tions and dis­con­tin­u­a­tions) was greater over this peri­od. In fact, 2007 was the first time since 1950 that pop­u­la­tion growth was high­er than dwelling growth. If the hous­ing short­age argu­ment was cor­rect, hous­ing prices should’ve start­ed to rise from 2007 onwards, not 1996.

The short­age argu­ment, how­ev­er, is not new. Every coun­try that has suf­fered through a hous­ing boom fol­lowed by a crash (a bub­ble) in recent years have always had its so-called ‘experts’ claim that prices were based upon fun­da­men­tal val­u­a­tions due to dwelling short­ages.

Take the US as a case study. Lead­ing insti­tu­tions such as the Fed­er­al Reserve, Nation­al Asso­ci­a­tion of Real­tors, Cal­i­for­nia Build­ing Indus­try Asso­ci­a­tion and Har­vard University’s Joint Cen­ter for Hous­ing Stud­ies pro­duced sophis­ti­cat­ed stud­ies to show that the $8 tril­lion hous­ing boom was caused, in part, by dwelling short­ages. These stud­ies were authored by pro­fes­sors, PhDs, and busi­ness­peo­ple, all with exten­sive knowl­edge and expe­ri­ence but with con­flicts of inter­est that could fill a small book. Yet, their exper­tise was as illu­so­ry as the short­age when the hous­ing mar­ket crashed. The same again occurred in Ire­land and Spain to the point where these three coun­tries are now bull­doz­ing entire neigh­bor­hoods to reduce some of the mas­sive over­sup­ply.

Going back to point first made in the intro­duc­tion, the 2011 Cen­sus revealed Aus­tralia had 7.8 mil­lion house­holds, 900,000 low­er than the NHSC’s fig­ure, with pop­u­la­tion also grow­ing by 300,000 less than pre­vi­ous­ly esti­mat­ed. These fig­ures have come as such a shock that the NHSC chair­man has report­ed that an under­sup­ply could be incor­rect. In fact, Mor­gan Stan­ley researchers have found that the cur­rent 228,000 dwelling under­sup­ply has now become an over­sup­ply of 341,000, a huge turn­around.

Giv­en the flawed nature of the NHSC’s reports, the run-up in hous­ing prices is like­ly due to oth­er fac­tors, specif­i­cal­ly the esca­la­tion in mort­gage debt used to finance real estate spec­u­la­tion. As of 2011, mort­gage debt reached $1.2 tril­lion or 85% of GDP. Com­bined with per­son­al debt, this climbs to $1.3 tril­lion or 95% of GDP, a stag­ger­ing sum. Also of con­cern is the $53 bil­lion in sub­si­dies and tax breaks that prop­er­ty own­ers receive.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.

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